Could a Profitable AMD Stand Up to Intel and Qualcomm?

Advanced Micro Devices (AMD +3.50%) will release its quarterly report on Thursday, and investors are excited about the potential for the company to post a profit for the quarter after a long string of losses. Yet even if AMD earnings turn positive, the much bigger question is whether it will be able to match up with Intel (INTC +1.07%) and Qualcomm (QCOM +0.24%) in both the fast-growing mobile space and the declining PC arena. If it can't, AMD's recent success could prove short-lived.

AMD has stood in the shadows of Intel for a long time, as its alternative line of microprocessors never managed to dislodge Intel's x86 architecture from its leadership position in the PC industry. Similarly, AMD has largely missed out on the mobile revolution, as Qualcomm did a much better job of capitalizing on the changing trend in computing and has even given Intel a huge challenge to overcome. Recently, though, AMD has sought to take command of a smaller niche in the chip market, and that has some investors excited about its future prospects for the first time in a while. Let's take an early look at what's been happening with Advanced Micro Devices over the past quarter and what we're likely to see in its report.

Stats on Advanced Micro Devices

Source: Yahoo! Finance.

Will AMD earnings get back into the black?
Analysts have gotten much more enthusiastic about AMD earnings prospects in recent months, as they've reversed their original third-quarter calls for a $0.02 per share loss and almost tripled their profit expectations for 2014. The stock hasn't really followed suit, though, falling about 6% since mid-July as investors wait for confirmation before committing to its shares.

AMD's shares got the quarter started on the wrong foot, even in the face of second-quarter earnings that seemed reasonably strong. The company posted better-than-expected results on earnings and revenue, and it also said it expected sales in the third quarter to improve as well. Yet concerns about low profit margins caused the stock to fall 13% the day after the announcement.

AMD's margin concerns stem from the fact that it expects gaming-console chips to carry much lower profit margins than its other products, explaining in part why it still remains much less profitable than Qualcomm and Intel. Given the cost pressures that console manufacturers have to handle in producing systems at a competitive price, AMD can't charge big markups if it wants to win their business. Still, the ramp-up in demand, especially in the short run as these new consoles come to market, has the potential to bring huge amounts of business to AMD for its efforts.

Longer-term, though, the question is whether future refreshes of gaming consoles will be enough to sustain AMD's profits. The company's new Mantle graphics application programming interface represents AMD's attempt to win back its former dominance in graphics, but rival NVIDIA still has a sizable lead in that niche. Yet outside that area, Intel's new low-power chip offerings should sustain its dominance over the PC-laptop space while also helping it push into tablets. Qualcomm has an even bigger edge in the mobile arena, and both it and Intel will act to counter AMD's attempts to boost its presence there.

In the AMD earnings report, watch to see how well the ramp-up in gaming console chips is going. That will be the near-term focus for investors, but also pay attention to the longer-term strategic vision the company sets out. Knowing where AMD sees itself headed should help you evaluate whether you think it's moving in the right direction.

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